Discover Financial Services (NYSE: DFS):
Second Quarter Results
2019
2018
YOY Change
Total loans, end of period (in
billions)
$90.2
$84.8
6%
Total revenue net of interest expense (in
millions)
$2,852
$2,603
10%
Total net charge-off rate
3.22%
3.11%
11 bps
Net income (in millions)
$753
$669
13%
Diluted EPS
$2.32
$1.91
21%
Discover Financial Services (NYSE: DFS) today reported net
income of $753 million or $2.32 per diluted share for the second
quarter of 2019, as compared to $669 million or $1.91 per diluted
share for the second quarter of 2018. The company’s return on
equity for the second quarter of 2019 was 26%.
“We are pleased to report another quarter of solid growth in
earnings and a strong ROE, as we continue to focus on disciplined
execution while delivering products and service that exceed our
customers' expectations," said Roger Hochschild, CEO and president
of Discover. "Key drivers of our performance continue to be our
investment in the Discover brand as well as delivering a
differentiated customer experience, which led to our being ranked
highest by J.D. Power for customer satisfaction among credit card
mobile apps and websites."
Segment Results:
Direct Banking
Direct Banking pretax income of $941 million increased by $104
million from the prior year driven by higher net interest income,
partially offset by an increase in the provision for loan losses
and higher operating expenses.
Total loans ended the quarter at $90.2 billion, up 6% compared
to the prior year. Credit card loans ended the quarter at $72.4
billion, up 7% from the prior year. Personal loans increased $110
million, or 2%, from the prior year. Private student loans
increased $273 million, or 3%, year-over-year, and grew $683
million, or 9%, excluding purchased student loans.
Net interest income increased $202 million, or 9%, from the
prior year, driven by loan growth and net interest margin
expansion. Net interest margin was 10.47%, up 26 basis points
versus the prior year. Card yield was 13.44%, an increase of 56
basis points from the prior year primarily due to prime rate
increases and portfolio mix, partially offset by higher interest
charge-offs. Interest expense as a percent of total loans increased
46 basis points from the prior year, primarily as a result of
higher market rates.
Other income increased $38 million, or 10%, from the prior year,
driven by higher discount and interchange revenue.
The 30+ day delinquency rate for credit card loans was 2.34%, up
18 basis points from the prior year and down 11 basis points from
the prior quarter. The credit card net charge-off rate was 3.49%,
up 15 basis points from the prior year and down 1 basis point from
the prior quarter. The student loan net charge-off rate, excluding
PCI loans, was 0.73%, down 43 basis points from the prior year. The
personal loans net charge-off rate of 4.33% increased by 36 basis
points from the prior year. Net charge-off rates were generally
higher due to the seasoning of recent years' loan growth and
supply-driven credit normalization.
Provision for loan losses of $787 million increased $45 million
from the prior year as higher net charge-offs were partially offset
by a lower reserve build. The reserve build for the second quarter
of 2019 was $69 million, compared to a reserve build of $93 million
in the second quarter of 2018.
Expenses were up $91 million from the prior year primarily as a
result of increases in employee compensation, professional fees and
information processing. Employee compensation increased as a result
of higher average salaries and benefits. Professional fees
increased primarily due to achieving a higher level of recoveries.
The increase in information processing was due to continued
investments in infrastructure and analytic capabilities.
Payment Services
Payment Services pretax income was $46 million in the quarter,
up $6 million from the prior year, due to higher revenue driven by
transaction volume growth.
Payment Services transaction dollar volume was $61.8 billion, up
8% versus the prior year. PULSE transaction dollar volume was up 7%
year-over-year, which reflects strong growth from existing issuers,
the impact of new issuers on the network, and expanded support for
our PINless products. Network Partners volume increased by 29% from
the prior year driven by AribaPay.
Share Repurchases
During the second quarter of 2019, the company repurchased
approximately 6.0 million shares of common stock for $461 million.
Shares of common stock outstanding declined by 1.8% from the prior
quarter.
2019 Capital Plan
On June 27, 2019, the Company announced that its capital plan
for the four quarters ending June 30, 2020 contemplates share
repurchases of up to $1.63 billion and an increase in the company's
quarterly dividend from $0.40 to $0.44 per share of common
stock.
The capital plan contemplates actions that maintain capital
ratios to meet regulatory and legal requirements and support the
company’s funding and other capital markets activities. The timing
and exact amount of repurchases under the new repurchase program
will be based on market conditions and other factors, including
Accounting Standards Update 2016-13, Financial Instruments - Credit
Losses, commonly known as CECL, which becomes effective on January
1, 2020, and will change how financial institutions, including the
company, account for expected credit losses.
Conference Call and Webcast Information
The company will host a conference call to discuss its first
quarter results on Tuesday, July 23, 2019, at 4:00 p.m. Central
time. Interested parties can listen to the conference call via a
live audio webcast at https://investorrelations.discover.com.
About Discover
Discover Financial Services (NYSE: DFS) is a direct banking and
payment services company with one of the most recognized brands in
U.S. financial services. Since its inception in 1986, the company
has become one of the largest card issuers in the United States.
The company issues the Discover card, America's cash rewards
pioneer, and offers private student loans, personal loans, home
equity loans, checking and savings accounts and certificates of
deposit through its direct banking business. It operates the
Discover Global Network, comprised of Discover Network, with
millions of merchant and cash access locations; PULSE, one of the
nation's leading ATM/debit networks; and Diners Club International,
a global payments network with acceptance around the world. For
more information, visit www.discover.com/company.
A financial summary follows. Financial, statistical, and
business related information, as well as information regarding
business and segment trends, is included in the financial
supplement filed as Exhibit 99.2 to the company's Current Report on
Form 8-K filed today with the Securities and Exchange Commission
(“SEC”). Both the earnings release and the financial supplement are
available online at the SEC's website (http://www.sec.gov) and the
company's website (https://investorrelations.discover.com).
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements, which speak to our expected business and
financial performance, among other matters, contain words such as
“believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,”
“may,” “should,” “could,” “would,” “likely,” and similar
expressions. Such statements are based upon the current beliefs and
expectations of the company's management and are subject to
significant risks and uncertainties. Actual results may differ
materially from those set forth in the forward-looking statements.
These forward-looking statements speak only as of the date of this
press release, and there is no undertaking to update or revise them
as more information becomes available.
The following factors, among others, could cause actual results
to differ materially from those set forth in the forward-looking
statements: changes in economic variables, such as the availability
of consumer credit, the housing market, energy costs, the number
and size of personal bankruptcy filings, the rate of unemployment,
the levels of consumer confidence and consumer debt, and investor
sentiment; the impact of current, pending and future legislation,
regulation, supervisory guidance, and regulatory and legal actions,
including, but not limited to, those related to tax reform,
financial regulatory reform, consumer financial services practices,
anti-corruption, and funding, capital and liquidity; the actions
and initiatives of current and potential competitors; the company's
ability to manage its expenses; the company's ability to
successfully achieve card acceptance across its networks and
maintain relationships with network participants; the company's
ability to sustain and grow its non-card products; difficulty
obtaining regulatory approval for, financing, closing,
transitioning, integrating or managing the expenses of acquisitions
of or investments in new businesses, products or technologies; the
company's ability to manage its credit risk, market risk, liquidity
risk, operational risk, compliance and legal risk, and strategic
risk; the availability and cost of funding and capital; access to
deposit, securitization, equity, debt and credit markets; the
impact of rating agency actions; the level and volatility of equity
prices, commodity prices and interest rates, currency values,
investments, other market fluctuations and other market indices;
losses in the company's investment portfolio; limits on the
company's ability to pay dividends and repurchase its common stock;
limits on the company's ability to receive payments from its
subsidiaries; fraudulent activities or material security breaches
of key systems; the company's ability to remain organizationally
effective; the company's ability to increase or sustain Discover
card usage or attract new customers; the company's ability to
maintain relationships with merchants; the effect of political,
economic and market conditions, geopolitical events and unforeseen
or catastrophic events; the company's ability to introduce new
products or services; the company's ability to manage its
relationships with third-party vendors; the company's ability to
maintain current technology and integrate new and acquired systems;
the company's ability to collect amounts for disputed transactions
from merchants and merchant acquirers; the company's ability to
attract and retain employees; the company's ability to protect its
reputation and its intellectual property; and new lawsuits,
investigations or similar matters or unanticipated developments
related to current matters. The company routinely evaluates and may
pursue acquisitions of or investments in businesses, products,
technologies, loan portfolios or deposits, which may involve
payment in cash or the company's debt or equity securities.
Additional factors that could cause the company's results to
differ materially from those described in the forward-looking
statements can be found under “Risk Factors,” “Business -
Competition,” “Business - Supervision and Regulation” and
“Management's Discussion and Analysis of Financial Condition and
Results of Operations” in the company's Annual Report on Form 10-K
for the year ended December 31, 2018, and “Management's Discussion
& Analysis of Financial Condition and Results of Operations” in
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2019, which are filed with the SEC and available at the
SEC's internet site (http://www.sec.gov).
DISCOVER FINANCIAL SERVICES (unaudited, in millions,
except per share statistics) Quarter Ended June 30,
2019 March 31, 2019 June 30, 2018 EARNINGS SUMMARY Interest Income
$2,977
$2,937
$2,636
Interest Expense
645
632
507
Net Interest Income
2,332
2,305
2,129
Discount/Interchange Revenue
759
677
724
Rewards Cost
460
446
461
Discount and Interchange Revenue, net
299
231
263
Protection Products Revenue
49
49
50
Loan Fee Income
102
104
95
Transaction Processing Revenue
48
46
42
Other Income
22
28
24
Total Other Income
520
458
474
Revenue Net of Interest Expense
2,852
2,763
2,603
Provision for Loan Losses
787
809
742
Employee Compensation and Benefits
427
425
400
Marketing and Business Development
224
195
224
Information Processing & Communications
101
99
86
Professional Fees
183
167
161
Premises and Equipment
26
28
24
Other Expense
117
110
89
Total Other Expense
1,078
1,024
984
Income Before Income Taxes
987
930
877
Tax Expense
234
204
208
Net Income
$753
$726
$669
Net Income Allocated to Common Stockholders
$747
$705
$663
PER SHARE
STATISTICS Basic EPS
$2.32
$2.15
$1.91
Diluted EPS
$2.32
$2.15
$1.91
Common Stock Price (period end)
$77.59
$71.16
$70.41
Book Value per share
$35.97
$34.60
$31.66
SEGMENT- INCOME BEFORE INCOME
TAXES Direct Banking
$941
$879
$837
Payment Services
46
51
40
Total
$987
$930
$877
BALANCE SHEET SUMMARY
Total Assets
$110,707
$110,720
$102,751
Total Liabilities
99,214
99,461
91,862
Total Equity
11,493
11,259
10,889
Total Liabilities and Stockholders' Equity
$110,707
$110,720
$102,751
TOTAL LOAN RECEIVABLES
Ending Loans 1, 2
$90,229
$88,743
$84,789
Average Loans 1, 2
$89,358
$89,353
$83,648
Interest Yield
12.82%
12.79%
12.28%
Gross Principal Charge-off Rate
4.03%
4.02%
3.78%
Gross Principal Charge-off Rate excluding PCI Loans 3
4.10%
4.10%
3.87%
Net Principal Charge-off Rate
3.22%
3.25%
3.11%
Net Principal Charge-off Rate excluding PCI Loans 3
3.27%
3.31%
3.18%
Delinquency Rate (30 or more days) excluding PCI Loans 3
2.18%
2.28%
2.08%
Delinquency Rate (90 or more days) excluding PCI Loans 3
1.04%
1.10%
0.99%
Gross Principal Charge-off Dollars
$898
$887
$789
Net Principal Charge-off Dollars
$718
$715
$649
Net Interest and Fee Charge-off Dollars
$158
$158
$138
Loans Delinquent 30 or more days 3
$1,939
$1,988
$1,725
Loans Delinquent 90 or more days 3
$922
$959
$821
Allowance for Loan Loss (period end)
$3,202
$3,134
$2,828
Reserve Change Build/(Release) 4
$69
$94
$93
Reserve Rate
3.55%
3.53%
3.34%
Reserve Rate excluding PCI Loans 3
3.58%
3.57%
3.38%
CREDIT CARD LOANS Ending
Loans
$72,393
$70,789
$67,812
Average Loans
$71,492
$71,363
$66,594
Interest Yield
13.44%
13.42%
12.88%
Gross Principal Charge-off Rate
4.43%
4.40%
4.12%
Net Principal Charge-off Rate
3.49%
3.50%
3.34%
Delinquency Rate (30 or more days)
2.34%
2.45%
2.16%
Delinquency Rate (90 or more days)
1.18%
1.26%
1.09%
Gross Principal Charge-off Dollars
$789
$774
$684
Net Principal Charge-off Dollars
$623
$616
$555
Loans Delinquent 30 or more days
$1,692
$1,731
$1,466
Loans Delinquent 90 or more days
$857
$891
$743
Allowance for Loan Loss (period end)
$2,691
$2,622
$2,334
Reserve Change Build/(Release)
$69
$94
$82
Reserve Rate
3.72%
3.70%
3.44%
Total Discover Card Volume
$39,935
$36,386
$38,430
Discover Card Sales Volume
$36,664
$32,899
$35,077
Rewards Rate
1.25%
1.35%
1.31%
NETWORK VOLUME PULSE
Network
$47,389
$47,106
$44,308
Network Partners
5,950
5,663
4,602
Diners Club International 5
8,472
8,278
8,417
Total Payment Services
61,811
61,047
57,327
Discover Network - Proprietary
37,891
34,051
36,339
Total
$99,702
$95,098
$93,666
1 Total Loans includes Home Equity and other loans.
2 Purchased Credit Impaired ("PCI") loans are loans that
were acquired in which a deterioration in credit quality occurred
between the origination date and the acquisition date. These loans
were initially recorded at fair value and accrete interest income
over the estimated lives of the loans as long as cash flows are
reasonably estimable, even if the loans are contractually past due.
PCI loans are private student loans and are included in total loan
receivables. 3 Excludes PCI loans (described above) which
are accounted for on a pooled basis. Since a pool is accounted for
as a single asset with a single composite interest rate and
aggregate expectation of cash flows, the past-due status of a pool,
or that of the individual loans within a pool, is not meaningful.
Because the Company is recognizing interest income on a pool of
loans, it is all considered to be performing. 4 Allowance
for loan loss includes the net change in reserves on PCI pools
having no remaining non-accretable difference which does not impact
the reserve change build/(release) in provision for loan losses.
5 Volume is derived from data provided by licensees for
Diners Club branded cards issued outside of North America and is
subject to subsequent revision or amendment. Note: See
Glossary for definitions of financial terms in the financial
supplement which is available online at the SEC's website
(http://www.sec.gov) and the Company's website
(http://investorrelations.discoverfinancial.com).
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190723005945/en/
Investors: Craig Streem, 224-405-5923
craigstreem@discover.com Media: Jon Drummond, 224-405-1888
jondrummond@discover.com
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